5 Major Differences Between Chapter 7 and Chapter 13 Bankruptcy

Title 11 of the United States Code lays down provision for individuals to file for bankruptcy.

Two of the most used chapters of the Bankruptcy Code are Chapters 7 and 13. Chapter 7 is all about liquidation of properties and assets in cases when the debtor has no steady income so as to meet the credit amount. Chapter 13, on the other hand, lays down the guideline for adjustment of debts by using a debtor’s regular income.

5 Major Differences Between Chapter 7 and Chapter 13 Bankruptcy

• Liquidation vs. Adjustment of Debt: When a debtor files for bankruptcy under Chapter 7, all his debts are paid off in one go. To make the adjustments most of his assets are liquidated. However, only his non-exempt assets can be liquidated. Not all assets are sold off to pay the creditors and debtors get to keep some of their properties or their personal belongings such as clothes with themselves. In Chapter 13 bankruptcy, the debt is repaid over a period of time of 3-5 years. The debt is adjustment by using the monthly income of the debtor.
• Short-term vs. Long-term: All Chapter 7 bankruptcy dealings can be completed in a short span of time. Since the debtor’s assets are liquidated, the debtors get their payments in one go. On the other hand, filing under Chapter 13 means that the debtors and creditors have to go through a long-term procedure. While Chapter 7 lasts only a few months, Chapter 13 allows repayment over a period of 3-5 years.
• Exemptions Rules: In Chapter 7, most states allow exemptions for the debtors. There are certain assets that debtors can select and not liquidate. These include equity of the debtor’s house known as homestead exemption, insurance (where the debtor is allowed to keep the cash value of the policies), retirement plans and some other personal belongings. For Chapter 13, while debtors have to pay some debts in full such as back taxes, alimony and child support, they are also allowed various exemptions under state laws. To understand Chapter 13 exemption rules, state rule books have to be studied.
• Additional Protection for Debtors Filing Under Chapter 13: Debtors using Chapter 13 for bankruptcy get a benefit that is not available under Chapter 7. Under Chapter 13, there is an additional protection to homeowners. If a debtor has more than one mortgage, the debtor can use the second mortgage as an unsecured debt and can have it stripped from the property. This can only happen when the first mortgage is declared unsecured.
• Means Test Differences: A Chapter 7 means test is done mainly to see whether a debtor is eligible to pay under Chapter 13 or not. Under Chapter 7, comparison is made of the individual’s household income and median annual income. On the other hand, a Chapter 13 means test is done to mainly understand whether the debt period should be 60 months long or 36 months long.

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